Thursday , February 22 2018
Home / COLUMNISTS / Andrew Mwenda / Africa’s highway to nowhere

Africa’s highway to nowhere

Museveni launches the Kayoola Bus, one of the projects of Kiira EV

Why our continent’s faith in foreign direct investment as a solution to our poverty is a pipedream

THE LAST WORD | Andrew M. Mwenda | Many presidents in Africa believe the development of our nations will come from Foreign Direct Investment (FDI). If a “foreign investor” – most especially a white man (and today increasingly an Arab, Indian or Chinese) – showed up in the capital of an African country, he would easily get audience with the president even where local investors take months or even years to be listened to.

And it is not just leaders. African elites – professionals, civil servants, journalists, academics, etc. – believe this gospel as well. Our leaders are products of our societies and their thinking reflects our attitudes, beliefs, sentiments, and shared mentalities. FDI is part of the wider belief that to develop, Africa needs to adopt the ways of the developed (Western) world. So even an intellectual kamikaze like me can only criticise FDI with a lot of trepidation.

The argument goes like this: Poor countries lack sufficient savings to finance necessary investments. FDI fills this gap. It also brings skills – technical and organisational. It creates jobs by employing locals and pays taxes thereby increasing the fiscal resources available to the state to serve its citizens. And it helps integrate the local economy into the global system of investment and trade. Who can question this?

These benefits are real but misleading. They are short-term achievements with long-term high costs. Foreign firms, given their experience and resources, tend to displace or stifle the development of indigenous/domestic/national firms. And as a rule, they do not export to their subsidiaries the most transformative activities of their business; such as research, design, and development. So a host country can assemble cars or mobile phones but cannot manufacture them. Yet most value is produced from these activities.

Building local firms is costly, both financially and politically. For example, assuming Uganda wanted to manufacture cars, like our famed Kiira Ev, which no one believes in, the government would have to protect it from international competition through high tariffs and subsidies. In the short term (20 to 40 years), Ugandan taxpayer would be subsidising the manufacturer and consumers would endure a poor quality product whose future is very hard to predict at a high price.

Yet the long term value of developing your own products such as Toyota or Sam Sung are extremely high – if you succeed. This becomes a difficult undertaking because the failure rate of such companies/products is very high; on average about two out of ten will succeed. This is what makes industrial policy difficult and FDI seem a welcome relief. Yet every country that has transformed from a poor agricultural society to an advanced industrial economy has had to pay this short-term cost. If Africa fails to industrialise, it is because we are not willing and/or are unable to accept to suffer this cost.

Notice that I have ignored other problems associated with FDI such as smuggling, profit repatriation, reliance on expatriates, transfer pricing, tax evasion or even officially granted tax relief etc. The later three issues are vital because for FDI to make money, it relies on public investments in education, health, roads, airports, railways, water systems etc. If it does not pay its fair share of taxes, it means that it is really cheating the host country that uses public funds to pay for the aforementioned investments.

18 comments

  1. Sorry, but Kiira is not Ugandan manufactured, it’s Ugandan assembled. So, the argument that the importation of cars will stifle its development is flawed at inception as the “raw materials” – the car components are as well being imported. Ricardo’s comparative advantage has never been more meaningful than when it comes to Africa’s technological advancement. Africa in this global village needs to balance between economic sense and economic identity. Can Africa survive from without Africa? Can a man survive on milk without owning a cow? That’s the question.

    • Rajab, actually you need read more on how vehicles are made. All car makers all over the world source materials from all over the world. So your argument is assembling versus manufacturing, then there is no car maker anywhere in the world.

  2. I DO agree with you on this one , that in order for AFRICA to have meaningful development, it must involve local players.
    BUT the political will must be there. The reason why African leaders want to involve FDI and thereby FOREIGNERS is the big elephant in the room CORRUPTION.
    AT the high level, a minister, president etc would rather deal with a foreigner while doing the “dirty stuff” than to deal with a local, first for reasons of secrecy where we believe that dealing with a foreigner , they will not divulge the details of your deal; and also to maintain that mystery.
    Most people in government, because they do not run known businesses , or where they do, the businesses do not produce the sort of profits that their lifestyles portray, would rather leave people guessing as to the source of their wealth, which 99% of the time is through corruption.

  3. WHAT you are describing here is what happened in INDIA and that is how they have BAJAJ scooters and motorbikes, TATA trucks and vehicles, MAHINDRA cars among other local products.
    Way back in the 70s, it was almost illegal to import anything including consumer products like electronics and even when you went into the country, personal items like the watch you were wearing and the camera were all entered onto your customs form.
    This was to ensure that you did not sell the them in the country and thereby avoid the tax, which was very prohibitive, and even if you claimed that the item had been lost or stolen, a strict customs officer could still compel you to pay.
    THIS spurred the local industries into producing these items, which were initially of a poor quality, but years down the line, the industries have perfected or improved their products .
    THE same happened in CHINA and most who can remember will know that back then to buy or own an article from CHINA was almost a disgrace.
    BUT today products from these countries are up there with products from well established manufacturing nations

  4. I have previously compared an economy to a child, most notably a DAUGHTER who while she is still at a certain stage , needs all the protection that a parent can offer.
    A young girl of 12 for instance can not be allowed to mix with each and every person or to have the sort of liberties that say a 25 year old woman would have. There are certain decisions, which for her own benefit, would have to be made for her, there are certain things that she would be denied completely to do as she would be required to do certain things.There are friends she would be expected to play with as there are those she would not be expected to associate with.
    Such is the nature of an economy, and ours is a very young economy that needs protection, but sadly those who should be protecting it are the ones conniving with the RAPISTS and helping them to DEFILE our otherwise young and immature and innocent economies, either out of ignorance, incompetence , greed or all combined.
    Such is the tragedy of AFRICA

    • This example is very touching ejakait; about a young girl; something everyone can comprehend yet could not compose. As for the gamekeepers-turned-poachers and the police-turned-thief, it is a curse that only the Almighty can deal with by introducing a very punitive situation such as ancient Israel went through from time to time. When one looks at history; the published part of it I mean, it becomes apparent that the human person as we know him deserves what they get. I have already for example started feeling apprehensive about this oil discovery; which was they say discovered by (You know him) a point that was driven home by another (Excellency) visitor recently. It has already acquired a title and an owner….yet the timeline has been published and dates back to 1890 when Captain Frederick Lugard of the Imperial British East Africa Company traveled to western Uganda to inspect reported surface oil seeps. The company(IBEA) instantly declared ownership over the oil deposits. With emergence of oil, do you think there will be maize grain any longer?Wait and see.

  5. FDI , in a way is the worst thing that can happen to an emerging economy. Investors by their very nature are there to make a profit and the bigger and the sooner, the better for them especially where the said economies and nations are perceived , rightly or otherwise, as unstable. Market economics dictates that where the risk is high, the profit margin is also usually high, so called high stakes.
    The foreign companies therefore come with only one thing on their mind – a huge and quick profit.
    OUR countries on the other hand , do not have what it takes to deal with these multinationals which with their vast experience and resources, are capable of extracting the maximum from their investments in the shortest time possible. Just like was seen in the case of the oil companies and the attendant tax dispute, if a foreign company has a tax bill of say $100m, it is easier and cheaper for them to give $10m in bribes than to go thru the process of even sometimes legally reducing their tax bill.
    We do not have the capability in technical terms of effectively supervising these companies and making them compliant to the extent of making their investments beneficial to our nations.
    The example of oil exploration contracts also comes to mind, because the format being used for instance, the cost recovery system, requires very stringent supervision , and as it is now, we may not have much coming to the country when production starts, since the bill, because of leaks, will be so huge.

  6. EVEN before the proverbial ink has dried on my posting, we already have glaring cases of where our beloved investors are at it again.
    In the pages of this paper, we have the very highly hyped gold investor who it seems took a leaf out of KAMLESHI of KENYA in the Goldenberg scandal, where they are in this case doing the reverse and exporting a lot more gold than is shown on their books.
    The Chinese in HIMA are also doing their bit wanting to export 30.000 tons , yes not grams, not kilograms , but tonnes of rock as sample for analysis!!!!!!!!!
    All these investors take us for the fools we really are.
    And even when they are regarded as locals, as is the case with SUDHIR and now ALAM, they look at us as pieces of dirt.All this encouraged by our RULERS whom they have managed to put in their pockets.

  7. MWENDA says that building local firms , therefore producing locally is both politically and financially expensive. NOT if the people and their leaders are singing from the same page.
    You can not do this when the head of state is flying around in the state of the art jet, when people walk barefooted and suffering from jiggers.
    You can not do this if the elite are flown out of the country for treatment when the basics are not their in the local hospitals..
    CHINA led a revolution in their industries and it started with Chairman MAO himself with his signature suit.
    The fish rots from the head and ours is a rotten when and we can not expect the rest of the fish to be fresh.
    While we are looking for FDI our ministers and high profile people are investing offshore.
    There is where the corruption in the WEST was very different from what we have in AFRICA in that all the money they got from corruption including slave trade was invested back in EUROPE, the reason you have towns and cities built by the likes of Cadburys, Tate and Lyle etc.

  8. It is interesting that Andrew berates African elites for lack of original thought and tending to uncritically take up ideas of development from foreign (Western Europe and US), but goes right ahead to recommend that we should emulate what China is doing, South Korea and Japan have done and US did sometime ago. This is hardly seminal, to put it politely. I think each African polity should chart it’s own development path, rather than regurgitating ideas, however repugnant, as viable solutions.

    I refer to these lines, “The process of developing a local capitalist class inevitably involves a lot of cronyism. / The process of capitalist development is harsh and involves cruel labour practices, exploitation, corruption, brutality etc”!

    Why don’t you go the whole way and advocate for slavery? It developed US and Europe!!

  9. 1.I dont think Uganda is desperate for Kiira Ev its good for the Academic world.Why do you think Toyota has an assembly plant in S.Africa and not in Ug or other part of Africa where 98% of the vehicles are Toyota brands its because we are poor.
    2. Who is confusing Ugandans with the idea of Buy Ug Build Ug ?Doesn’t that tantamount to economic sabotage of other nations’s products?We live in a global market where international agencies require bidding for a product.For Example, ADB has renovated many science based institutions in Ug and they require furniture but the ADB policy on procurement allows international bidding not direct procurement now how will we market our product with the BUBU mentality?
    3.Africa still has a long way to go because the poor have lot of rights can you imagine Abid Alam one of the richest Ugandans being arrested coz of the poor?will those peasants lead Ug to a 1st world? Remember Ug’s economy is sustained by S.Africans,Indians and the Chinese;How i pray that investors also demonstrate and refuse to pay tax(The politics of window dressing will not take us far)
    4.The Doctors in Ug want to live like the Kardasians;they want to take a holiday in the Maldives or Barbados we feel them but it will be done later.
    5.Africans are used to affirmative action but in the Business World,there is no affirmative action.
    6.literally;The high ways in Uganda are being misused you find Rajab,Ejakait and Sons in their cars with portable microphones and public address systems marketing herbs to boost the sexual powers of men and women are Ugandans all that sex minded?
    7. It Would not be a bad idea to privatize Mulago.
    8.Govt needs to decentralizes the Allocation for funds to health centre 3 & 4.
    9.By now govt should have known that most diseases in Uganda are caused by sex; men always have emergencies when it comes to sex and the women are so generous.

  10. Good analysis Winnie especially point 2 and 3.

    • I w’d also give it to her for point number 6. She’s number one.

    • With all due respect, I do not see what is so grand about these two items, which I will desist from calling points.
      We tend to think that managing an economy is such a complicated thing but one person who is known to have so prudently managed the British economy, Margaret Thatcher, said that you have got to bring the managing of a nations economy to the level of managing your household.
      Buying things that you produce is just the same as cooking the food you eat in your own house as opposed to eating in a restaurant. If you gave your children the choice, and the man in the house as well, the choice of eating kalo and beans made at home and a trip down to the take away or Sheraton, you would have a unanimous vote in favor of the latter two.
      You can only allow fair competition where you have a fair and level playing field. The UK , for instance can not want to stop German cars coming into the UK because they too want to export their cars and other products where they may have a comparative advantage to Germany.
      But then again , with people like WINNIE who is an NRM, they are used to competition in a tilted field.
      The WEST for instance, does not have to put in place laws restricting the importation of manufactured goods from third world countries, our goods simply do not meet the standards and even when special programs have been put in place to favor our goods ( like AGOA, Most Favoured Nation), we have not been able to take advantage instead destroying factories like Coffee Marketing Board and setting up ones where girls are abused.
      The WEST does not import from us because they WANT to, its simply because they NEED whatever it is that they import from us, goods that they do not have , like minerals, oil, etc.
      So let us not for one moment delude ourselves that we are involved in fair trade with the WEST.

  11. Mwenda”s argument seems to suggest that since the developed nationss had to dig trenches to lay cable in a bid to reach all with the wired telephone, Afrucans should do the same and not take advantage of the mobile phone.
    There is such a thing as leapfrogging, and whenever we utilise FDI, we are simply leapfrogging by making use of the research which already cost billions of dollars, as well as the capital it brings along
    What”s wrong with taking a shortcut?

    • It would be OK if it were not for the attendant problems.

      There are situations which require copy and paste and there are situations which require originality.

      Unfortunately our rulers are not able to differentiate between the two or for reasons best known to themselves, they choose to take the wrong course.

  12. There is this documentary about Glen core a Swiss company that invested in Zambia’s copper. Glencore at some point took home billions of dollars in profit while it only paid 50 million dollars in taxes!!!! And this is the plight of the mineral sector in Africa, our only immediate hope in getting us out of poverty.
    I have always used the analogy of a herdsman.
    Which herdsman do you know who will hire someone to slaughter his bull and take only one leg and give away the rest to the man that has slaughtered.
    This is common sense and it’s what is happening to our resources. We have these clowns for leaders who can’t think outside the box. Who are ready to sell out their countries for kick back or because a white man smiled for them and they have condemned us to perpetual slavery.
    FDI is nothing but a second phase of colonial and it’s making us second class citizens in our countries , no different from colonial times. Look around you, which people have the biggest businesses or occupy the best neighborhoods?
    How can you compete with someone who has a 100 years headstart when you are giving away all your resources for a song?
    In the decades that FDI has been parrotted, has their been a tremendous change for the common man or not?

Leave a Reply

Your email address will not be published. Required fields are marked *